Let’s face it: superannuation is depressing. It means getting old. Saggy skin. Weak knees. Rotten teeth. Ailments.
No one wants to waste time worrying about that when their knees are strong, and their skin clear and firm.
But that’s just it: you don’t need to worry about it to get super right. It’s actually about as easy as falling off a log.
All you need to do is cut out some of the pointless stuff you currently spend your money on, and stick the savings into your super. Do that, and you’ll probably be a millionaire by retirement.
And the earlier you start, the better.
The reason? Compound interest
Every year, your super earns interest. And the next year, it earns interest on that interest. And the next year it earns interest on that interest. And so on.
Given the average super fund returns about seven per cent per annum in the long run, that works out as a pretty massive gain.
Here’s an example.
Say you’re 21 and have just landed a $50,000-a-year job. If you put aside an additional $50 a week to put into your super until the age of 35, you will end up with an extra $420,000 in your super than if you’d just relied on your employer’s contribution. And that’s a conservative estimate.
Just to reiterate: over the course of your working life, you will have turned $39,000 into $420,000 – i.e. increased it tenfold without lifting a finger.
If you wait till you are 35 to add that additional $50 a week, your $39,000 would grow by only half as much.
If you can stretch to $100 a week, then you will end up earning almost $1 million extra by the time you retire. That’s plenty to get those rotten teeth and gammy knees sorted.
Why it makes sense to start young
Compound interest is the main selling point.
But another one is that when you’re young you have very few financial commitments. Responsibilities (above all, children and mortgages) can prove so expensive, you may find at that stage of life you have no spare change at all.
Whereas when you’re in your 20s the chances are once you’ve paid the rent and bills, the rest of your income is disposable.
If you are still living with your parents, then you’re in an even better position.
Many young people assume that the wisest thing to do with spare cash is to save for a house deposit. The Australian obsession with owning property is so fervent as to obscure rational thought. But there is actually a very strong argument that super should be the priority in your 20s and early 30s, after which you should look at buying a property.
Why? Compound interest.
How to do it
The first thing to do is make sure your super fund has a good track record and doesn’t charge exorbitant fees. You can do that here. Super funds with good online tools make it easier to contribute and monitor your super.
You should also make sure you consolidate all your super into one account, to avoid paying fees to several different funds. That can add up to several hundreds of dollars a year, and is a ridiculous waste of money. See the ATO website for details.
Also make sure you’re not forking out hundreds of dollars on a life insurance policy you don’t need (while disability insurance might be useful, death insurance is probably a waste of money if you don’t you have a family to support).
Finally, save money.
Saving money is not rocket science. It means not buying something you might otherwise have bought. I’ll spare you the “cut out the daily flat white and buy yourself a French press” speech.
A first step is to cut the pointless crap. If you do, you’ll be well on the way to becoming a millionaire. And I’m willing to bet you won’t be any less happy.